What Peter The Great, Vladimir Putin, And Crimea Have To Do With Your Portfolio

Includes: BA, CVX, GM, MCD, PEP, XOM
by: Jason Galanis


The dangerous geopolitical water that Vladimir Putin is currently steering Russia into has a clear historic context.

World leaders should have been able to predict Russian aggression in the Crimean Peninsula and surrounding territories.

Growing conflict will result in an immediate spike in commodities prices.

Long-term conflict will greatly impact the US automotive, aerospace, and energy industries with special emphasis on: GM, BA, XOM, & CVX.

Most of the western world is looking on with shocked disbelief as events unfold in Ukraine. However, the dangerous geopolitical water that Vladimir Putin is currently steering Russia into has a clear historic context.

Far from being an egocentric and out-of-touch dictator bent on world conquest, he is channeling his inner Peter the Great and asserting Russian influence over the Crimean Peninsula in order to gain a foothold in the Black Sea. What is different this time around, however, is the immense economic and political consequences that his actions will have in this dynamically interconnected 21st century world. Further, it would behoove anyone with market exposure to understand the conflict as well as examine how it could impact their portfolio.

Historic Context of Russian Influence in the Crimean Peninsula

Ever since Peter the Great, Russia has endeavored for access to warm water ports. For most of its history, Russia had no warm-water port and no access to the Mediterranean with all its commercial wealth. Despite being the most expansive country in the world, this geographic hindrance was something Peter desperately sought to rectify. Starting in 1695, Peter embarked on immensely costly yet successful military campaigns in and around the Crimean Peninsula and extended Russian influence into the Black Sea.

Future Czars expanded Russian influence in this great new southeastern region of Europe, calling it "New Russia (Novorossiya)." Russian citizens and rulers alike took great pride in this hard-won region and did not relinquish control until the downfall of the Soviet Union. While the region was technically part of Soviet Ukraine since 1920, it would be hard to argue that the Soviet Union did not still exert complete control over the territory. Also, even after the fall of the Soviet Union, Russia still dominated the political and economic affairs of this area.

So why does Russia all of a sudden care enough about this influential region to mobilize their military to preserve their questionable interests? Well, up until the Ukrainian Revolution of early 2014, Russia's claim to the area was never legitimately questioned. However, the pro-Western Ukrainian government that emerged after the Revolution sought to change that. Ultimately Russia felt threatened.

A similar event unfolded just under 6 years ago. When Georgia elected a pro-Western government in 2008, Russia intervened militarily claiming they wanted to protect the ethnic Russian populations within the Georgian provinces of South Ossetia and Abkhazia. Russia's action, as well as the U.S. response is eerily similar to recent events in Ukraine.

Back in 2008, The U.S. threatened action and Vice President Dick Cheney even decried that "Russian aggression must not go unanswered, and that its continuation would have serious consequences for its relations with the United States, as well as the broader international community. However, Russian intervention in Georgia was quick, decisive, and unchecked. There was no U.S. or European response of any substance, and Russia continues to occupy Georgia to this day.

With this in mind, would one expect Putin to act any differently in Ukraine? Unfortunately, hindsight tells us no and this time the economic and political affects will be more pronounced.

How this Conflict Will Affect the World Economy

The jury is still out on how this conflict will impact world trade. However, in a welcome sign of international hardball, President Obama is finally starting to ratchet up the rhetoric of skepticism towards Russia. If he is successful in dissuading further Russian aggression, we may have seen the worst of the economic impacts of this conflict. If he is not, a majority of the gains we have seen in the stock market since the Great Recession could evaporate.

Russia has Europe over a barrel so to speak as they are in a strong position to threaten Europe with higher gas prices. Gazprom (GAZP) alone is estimated to supply 30% of Europe's natural gas consumption. Further, some countries like Germany and Italy receive the lion's share of their oil and gas supplies from other Russian energy giants like Rosneft (ROSN). As one can easily see, the world economy will suffer immensely if both sides continue this dangerous game of geo-political brinksmanship.

Last month, in a letter to 18 world leaders, Putin threatened to cut off the natural gas lines, which supply most of Europe's gas and run through Ukraine, if Ukraine is unable to repay the $35 billion in gas related debts that it has incurred with Russian.

In 2009, by using a similar tactic, he effectively shut down the pipeline and caused a spike in gas prices throughout Europe. Since Ukraine is still in economic shambles related to its messy civil war, it is quite unlikely that the country will have the resources or political desire to bow to Russia's demands. I believe Putin knows this and is just trying to set the stage for further conflict based on irrational economic disputes.

Considering 60% Russia's natural gas exports flow through these Ukrainian pipes, continued conflict could have massive repercussions. In the short term, growing conflict will result in an immediate spike in commodities prices.

Natural gas prices have already risen and this could create a multiplier effect across other vital commodities to world trade. Further, Ukraine and Russia are considered the breadbasket of Europe and conflict in either region could greatly increase the cost of foodstuffs across the continent. While this short-term spike in commodity prices could derail the growth our shaky world economy has recently experienced, the long-term impacts of conflict could be even more dire.

Companies at Risk

While neither Russia nor Ukraine are major trade partners with the US directly, the continuation or escalation of conflict in southeastern Europe would create major long-term impacts for many multinational corporations and industries. The automotive, aerospace, and energy industries will be disturbed the most.

In the auto industry, General Motors (NYSE:GM) seeks to lose the most from continued conflict with Russia. With over 250,000 vehicles sold every year, GM represents a 9.1% share of Russia's total auto industry. Further, it has recently invested heavily in the country to expand production, most notably its new plant in St. Petersburg.

While there is not a huge market for American aerospace products in Russia, the country currently supplies many of the already expensive alloys critical during production. For example, Boeing (NYSE:BA) obtains nearly 35% of its titanium from Russian VSMPO-AVISMA and has plans to invest $27.0 billion in the country in the coming decades.

US-based energy conglomerates could lose billions that they have invested in the energy infrastructure of Russia. Both ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) have invested heavily over the last decade in Russia's new energy boom. Further, both have immense interests in the newly discovered oil deposits of the Artic Shelf and in Western Siberia.

Other industries will suffer immensely as well. For example, beverage giant Carlsberg (CARLb.CO) has 32% sales exposure to Russia and Pepsi (NYSE:PEP) has annual sales in Russia near $5 billion. McDonald's (NYSE:MCD) has over 350 restaurants in Russia and 80 in Ukraine. German chemicals colossus BASF (BASFn.DE) sells one quarter of their products to Russia.

Ultimately the world has a lot to lose from a continued or escalated conflict in southeastern Europe. Hopefully cooler heads will prevail and our current economic resurgence can proceed. However, if history has taught us anything, it is that despots will not relinquish hard-won territories without a fight.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.